Western Railroad Discussion > KCS to Investors: Beware

For those that get the Railway Age daily digital report, any thoughts on this morning's report? There was also a related editorial by RA Editor Frank Wilner about this in February of this year.

I'll try to provide a link but am uncertain if one has to be a subscriber to Railway Age. But the bottom line is that the Mexican govt and new Prez is putting the screws to the KCS (and to a lesser extent UPRR and it's 26% stake in the Ferromex), with threats to ReNationalize the Mexican RRs. Cutting off their noses to spite their faces. After the 2 U.S. RRs have invested $8 BILLION bucks down there. What a joke of a country that is on the verge of becoming.

Let's see if this link works:
http://cl.publicaster.com/ClickThru.aspx?pubids=0895%7c16387%7c17943%7c1152&digest=TWaBsDDOuooJZluyPMN%2feQ&sysid=1

Also don't miss the February, 2014 editorial by Railway Age Editor Frank Wilner which is hyperlinked in at the bottom of today's Railway Age Digital Newsletter, as well as a related article, at the bottom.



Edited 3 time(s). Last edit at 04/16/14 06:19 by Red.

The Mexican government announced earlier this year it planned to break up preferential deals with national champion companies. The government owned oil company, which has a monopoly over oil production, was seen as the major target. But the government is making clear that distribution companies, like KCS and pipelines, are also going to be forced to allow competition.

Exactly what form that will take (open access, allowing haulage or brokers to bid for space on trains, etc) is still open to discussion and $$$.

The long time Mexican government ruling party and the national champion companies and their unions pretty much had a fifty year+ lock on the economy of Mexico. Made for lots of opportunities for corruption and stagnation.

I am more worried about our country becoming a joke.

If OUR government has any common sense, they would make it QUITE CLEAR that any attempt to void or modify existing legal contracts with US based companies will not be tolerated, and economic retribution will be coming their way if they continue down that path.



Edited 1 time(s). Last edit at 04/16/14 08:14 by junctiontower.

Mexico is seeking help from American companies in the oil production. Rest assured that if they take away UP and KCS deals that the oil companies will not get involved with Mexico. So, I don't think there is a lot to worry about by the railroads.

It's just good newsreel soundbites. And for KCS to speculate about it openly in the US either means they've received solid concrete proposals from the Mexican government, OR they're just saying this to get their stocks to come down a bit so that they can purchase more of them...
Either way, until it's a solid on paper proposal, it's just bluster from both sides.

junctiontower Wrote:
-------------------------------------------------------
> If OUR government has any common sense, they would
> make it QUITE CLEAR that any attempt to void or
> modify existing legal contracts with US based
> companies will not be tolerated, and economic
> retribution will be coming their way if they
> continue down that path.

How well did that work with Saudi Arabia which nationalized Aramco and seized US oil company properties? Or Venezuela, which did the same from Exxon, etc? We still import oil from each. Or Cuba, which seized Hershey's property and railroads, United Fruit's plantations, and executed American citizens. The US government hands out waivers to European companies to do business with former US assets all the time.

And we even get to hear Joe Kennedy tell us about our friends the Venezuelan people and their desire to share low cost oil with America's proleteriat.

All y'all are a few months behind on this.

The proposed legislation was passed by Mexico's House of Delegates in December. The Senate has not voted in favor and shows no sign of doing so.

KCS believes it is covered by an iron-clad contract allowing it exclusive rights on the routes it paid for and believes it can go to arbitration at a NAFTA panel to enforce those rights.

The boilerplate language cherry-picked by Railway Age simply asserts that it could be a Bad Thing for KCS investors if the bill becomes law. No different than dozens of other risk disclosures in a 10-K.

(BTW, the share price is up about $4 the last couple of days, so no one crapped themselves upon reading either the 10-K or the Railway Age story).



Now, for a little back-story on this that I gleaned from conversations with folks in the c-suite at KCS:

The origin of the problem is a group of miners that have been treated badly by Ferromex about their freight rates.

Can anyone guess why Ferromex would do such a thing? Anyone? Anyone? (Channeling his best Ferris Bueller-era Ben Stein.....)

Because Ferromex is controlled by a mining conglomerate, Grupo Mexico.

Basically, the problem with Mexican railroad law is that it established only two types of rates: negotiated and tariff. There is no avenue for appeal if the railroad refuses to negotiate and the tariff is outlandish. Here in the States, the STB can and does hear such disputes and issues rulings. There's nothing comparable in Mexico. So, Ferromex does its owners' bidding and abuses its owners' competitors.

It seems more likely that the Mexican Senate will be the cooler head that prevails and helps create a rate appeals board rather than the destructive and possibly contract-breaking law the Delegates passed going into effect.


There were a couple of other mildly comical elements to the Delegates bill and complaints.

First, the Delegates complained that the investors who acquired concessions (KCSM, Ferromex, Ferrosur) have not invested in their railroads, as evidenced by only a handful of miles of new track having been built. Well, there's a reason. The concessions prohibit construction of new routes. KCSM, for example, would like to serve the Port of Veracruz but its route doesn't reach the port. Instead, the port is building out to the KCSM and will grant trackage rights.

Second, the Delegates want to award concessions to investors willing to build brand-new railroads to Mexican beaches. In my business, we having a saying, "The easiest way to make a small fortune is to start with a large one." Building to Mexican beaches would seem to follow that path.

BobE

junctiontower Wrote:
-------------------------------------------------------
> If OUR government has any common sense, they would
> make it QUITE CLEAR that any attempt to void or
> modify existing legal contracts with US based
> companies will not be tolerated, and economic
> retribution will be coming their way if they
> continue down that path.

That's my view, EXACTLY. As this appears on the surface of it to be a "Fidel Castro" type of desire of a communistic Banana Republic, wherein U.S. companies have invested billions of dollars and entered into legal, contractural agreements. Meanwhile, EXCELLENT analysis by BobE! (And I did find it strange that the KCS would "warn its own investors." BobE states the very reason why it did so).



Edited 1 time(s). Last edit at 04/16/14 09:47 by Red.

Thanks for explanation on this BobE. You are my go-to guy on TO for such information.

RNP47 Wrote:
-------------------------------------------------------
> I am more worried about our country becoming a
> joke.


That is QUITE a statement...........

Tell me more.

ns1000 Wrote:
-------------------------------------------------------
> RNP47 Wrote:
> --------------------------------------------------
> -----
> > I am more worried about our country becoming a
> > joke.
>
>
> That is QUITE a statement...........


I think it is too late...

In any case, the railroads must be very concerned about losing thier investment. As BobE explains, though, it sounds like perhaps they need not worry...

KCS talked some about the Mexico issue on their call with investors this evening. They think the worst has passed. The Senate has not determined that the lower house bill can become law without substantial modification. Something like 17 rail operators are in negotiations with the government over the issues and believe that their investments will be ok. That said, CEO Starling did remind everyone that the concessions were paid for ($1.4 billion in the case of what is now KCSM) and they plan to protect it through all legal avenues.

BobE

RNP47 Wrote:
-------------------------------------------------------
> I am more worried about our country becoming a
> joke.

I'm more worried about our country becoming the next Roman Empire...

I'll stay; you may leave if you think it is a joke. Freedom.

What does NAFTA have to say about all this?

Jim

Chooch:

There is an arbitration panel that would hear a complaint filed by an aggrieved party in one of the other countries.

The best-known case actually has its own Wikipedia page:

http://en.wikipedia.org/wiki/Canada%E2%80%93United_States_softwood_lumber_dispute

Synopsis:

US put tariffs against Canadian softwoods, claiming that the Canadian government unfairly subsidized forestry companies. Canadians pursued claims through NAFTA, repeatedly won, US refused to abide by decisions. (See the section on Lumber IV for specifics).

BobE

BobE Wrote:
-------------------------------------------------------
> Chooch:
>
> There is an arbitration panel that would hear a
> complaint filed by an aggrieved party in one of
> the other countries.
>
> The best-known case actually has its own Wikipedia
> page:
>
>
>
> Synopsis:
>
> US put tariffs against Canadian softwoods,
> claiming that the Canadian government unfairly
> subsidized forestry companies. Canadians pursued
> claims through NAFTA, repeatedly won, US refused
> to abide by decisions. (See the section on Lumber
> IV for specifics).
>
> BobE


Continuing a long tradition of the US invoking international law, when it's in the country's interest. And, ignoring it when it is not in the country's interest.